Stick With the Trend in This Overbought Sector

In Wednesday’s relatively dull session that ended mixed, the Dow industrials fell 0.3%, dragged lower by disappointing revenues from IBM (IBM[1]). And 19 of the Dow’s 30 stocks ended in the red.

IBM fell 3.3% even though it beat analysts’ earnings estimates, because it failed to meet consensus revenue estimates. United Technologies (UTX[2]) jumped 1% following a better-than-expected earnings report.

The Dow Jones Transportation Average was up 1.1%, pushed higher by rail giant Norfolk Southern (NSC[3]), which spiked 4.8% after it reported better-than-expected earnings and revenues.

At the close, the Dow Jones Industrial Average fell 41 points to 16,373, the S&P 500 rose 1 point to 1,845, and the Nasdaq gained 17 points at 4,243. The NYSE traded total volume of 3.4 billion shares, and the Nasdaq crossed 2 billion shares. Advancers outpaced decliners on the Big Board by 1.8-to-1, and on the Nasdaq, advancers were in the lead by 1.4-to-1.

While the Dow and S&P 500 are struggling with a dull market, the Nasdaq and the Russell 2000 (not shown) have been blasting to new closing highs. One of the reasons is that technology, banks and biotech stocks are in favor while the more conservative blue chips are being ignored.

On Jan. 8, a massive breakout occurred in the iShares Nasdaq Biotechnology (IBB[5]). Currently, the sector appears overbought, but the advance has found few sellers thus far, and the expression “Stocks that make new highs will continue to make new highs” seems appropriate. (The Trade of the Day[6], Celgene (CELG[7]), represents 7.4% of IBB’s assets).

Conclusion: Despite appearing overbought, IBB has been plodding along, forming a very steady bull channel. As the old-timers would say, “Stick with the trend.” And with regard to the more senior indices, like the S&P 500 and Dow 30, “Never sell a dull market.”

As noted yesterday[8], there are a limited number of sellers at the S&P 500’s resistance line at 1,850 and a huge amount of cash on the sidelines. But the institutional investors are holding back, waiting to see if earnings results can support the bull market in the face of a reduced bond-buying plan from the Federal Reserve.

Of the 81 companies in the S&P 500 that have reported earnings so far, 49 have exceeded analysts’ EPS forecasts and 54 have exceeded sales. However, only 45 of those have had their shares gain, according to FactSet.

This timid approach may end with an explosive round of buying.

Today’s Trading Landscape

To see a list of the companies reporting earnings today, click here[9].